This gap between how economists think and what economies are is evident... But hitherto nobody has closed the gap... This, argues McKinsey's Eric Beinhocker in a brilliant,
thought-provoking and wide-ranging book ... is about to
change. Welcome, he argues, to the world of "complexity economics",
computer-based simulations and more realistic assumptions. ...

"The economy is a marvel of complexity," he states. "Yet no one designed it
and no one runs it." How can such a system have been created? Why has complexity
increased over time? Why has so much of the rise in wealth and complexity been
so sudden? The answer to these questions can be found, suggests Mr Beinhocker, in understanding that the economy is "a complex adaptive system",
which works under the same logic as biological evolution - differentiate, select
and amplify.

Conventional economics cannot explain such an evolutionary process, because
the science that has provided most of its ideas is not biology, but physics. ... As Mr Beinhocker
puts it: "The economy is ultimately a genetic replication strategy. It is yet
another evolutionary Good Trick . . . built on the complex Good Trick of big
brains, nimble tool-making hands, co-operative instincts, language and culture."
So successful is the economy that much of humanity no longer has to focus on
staying alive. ...

How has today's economy evolved? The answer is: through the interaction of
three processes. The first is the evolution of physical technology, which
spurted after the scientific revolution of the 17th century. The second is the
evolution of social technologies, such as money, markets, the rule of law, the
corporation and democracy. The third is the evolution of businesses, the
entities that live, die and replicate in the economy.

Economic evolution
and biological evolution are different: the fact that human beings can plan and
adapt makes economic evolution faster and more purposive than biological
evolution. But it is still evolution. ...

As Mr Beinhocker puts it: "Markets win over command and control, not because
of their efficiency at resource allocation in equilibrium, but because of their
effectiveness at innovation in disequilibrium." Markets are a hugely powerful
evolutionary mechanism: they are innovation machines.

Is this thesis true? Is it useful? Does it replace standard economic
analysis? The answers to these questions, I believe, are: yes; yes; and no.

First, today's economy has indeed evolved. ... Second, this way of thinking is extremely useful. The book explains, for
example, why most companies fail to sustain competitiveness. ... As Mr Beinhocker
notes: "Companies don't innovate; markets do." So businesses should think in
terms of evolutionary adaptability. But they find this difficult, because they
are far better at executing plans than adapting to unforeseen circumstances.
That is the price they pay for hierarchy.

Finally, what does "complexity economics" mean for economics? Much less than
Mr Beinhocker imagines, I believe. Even such great evolutionary theorists as
William Hamilton and Maynard Smith also used equilibrium models. Similarly, the
economist's simplification of human motivation is often the only way to make a
complex problem tractable. The implications of the ad hoc, computer-based
simulations
Mr Beinhocker recommends are often difficult to understand. Above all,
traditional economics often works: look at the success of inflation targeting or
at the benefits of trade. ...

This gap between how economists think and what economies are is evident... But hitherto nobody has closed the gap... This, argues McKinsey's Eric Beinhocker in a brilliant,
thought-provoking and wide-ranging book ... is about to
change. Welcome, he argues, to the world of "complexity economics",
computer-based simulations and more realistic assumptions. ...

"The economy is a marvel of complexity," he states. "Yet no one designed it
and no one runs it." How can such a system have been created? Why has complexity
increased over time? Why has so much of the rise in wealth and complexity been
so sudden? The answer to these questions can be found, suggests Mr Beinhocker, in understanding that the economy is "a complex adaptive system",
which works under the same logic as biological evolution - differentiate, select
and amplify.

Conventional economics cannot explain such an evolutionary process, because
the science that has provided most of its ideas is not biology, but physics. ... As Mr Beinhocker
puts it: "The economy is ultimately a genetic replication strategy. It is yet
another evolutionary Good Trick . . . built on the complex Good Trick of big
brains, nimble tool-making hands, co-operative instincts, language and culture."
So successful is the economy that much of humanity no longer has to focus on
staying alive. ...

How has today's economy evolved? The answer is: through the interaction of
three processes. The first is the evolution of physical technology, which
spurted after the scientific revolution of the 17th century. The second is the
evolution of social technologies, such as money, markets, the rule of law, the
corporation and democracy. The third is the evolution of businesses, the
entities that live, die and replicate in the economy.

Economic evolution
and biological evolution are different: the fact that human beings can plan and
adapt makes economic evolution faster and more purposive than biological
evolution. But it is still evolution. ...

As Mr Beinhocker puts it: "Markets win over command and control, not because
of their efficiency at resource allocation in equilibrium, but because of their
effectiveness at innovation in disequilibrium." Markets are a hugely powerful
evolutionary mechanism: they are innovation machines.

Is this thesis true? Is it useful? Does it replace standard economic
analysis? The answers to these questions, I believe, are: yes; yes; and no.

First, today's economy has indeed evolved. ... Second, this way of thinking is extremely useful. The book explains, for
example, why most companies fail to sustain competitiveness. ... As Mr Beinhocker
notes: "Companies don't innovate; markets do." So businesses should think in
terms of evolutionary adaptability. But they find this difficult, because they
are far better at executing plans than adapting to unforeseen circumstances.
That is the price they pay for hierarchy.

Finally, what does "complexity economics" mean for economics? Much less than
Mr Beinhocker imagines, I believe. Even such great evolutionary theorists as
William Hamilton and Maynard Smith also used equilibrium models. Similarly, the
economist's simplification of human motivation is often the only way to make a
complex problem tractable. The implications of the ad hoc, computer-based
simulations
Mr Beinhocker recommends are often difficult to understand. Above all,
traditional economics often works: look at the success of inflation targeting or
at the benefits of trade. ...